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NEW YORK (
IBM(IBM - Get Report) shares were off 1.4% to $192.25 after Goldman Sachs downgraded the Dow Jones Industrial Average component, citing a concern about the company's near-term business outlook.
Analyst Bill Shope downgraded shares to "neutral" from "buy," lowering his price target to $200 from $220, noting the company may begin to see some pressure on its growth markets, and see pressure intensify on some high-margin revenue streams. He noted that since Goldman upgraded IBM in Aug. 2011 and that shares have underperformed the S&P 500 notably, gaining 15.9%, versus a gain of 39.2% for the broader index.
"We believe IBM's long-term secular prospects remain sound, but the company appears to be going through a challenging period that may limit operational earnings upside and produce more quarterly volatility than investors have been accustomed to," Shope wrote in the note. As such, he lowered earnings estimates for 2013, 2014, and 2015. He now expects IBM to earn $16.61 a share on $103.66 billion in sales for fiscal 2013, down from $16.71 and $104.44 billion. Estimates for 2014 were reduced to $17.92 a share in earnings on $105.67 billion in sales, down from $18.10 a share and $106.73 billion in revenue. Fiscal 2015 was taken down as well, with estimates lowered to $20.01 a share in earnings on $108.12 billion in revenue, down from $20.07 a share and $109.21 billion in revenue.
IBM has been able to perform exceptionally well in "growth markets," including Brazil, Russia, India and China, with these markets representing nearly a quarter of IBM's total revenue. However, Shope believes those markets are starting to stagnate, as they've seen constant currency growth of only 1% during the first quarter of 2013. Shope believes this is likely to persist for the rest of the year, given recent earnings from
Oracle(ORCL - Get Report) and
Accenture(ACN - Get Report). "Furthermore, within China specifically, signs of weakness continue to expand beyond just the technology sector as credit conditions tighten," Shope penned in the note.
Written by Chris Ciaccia in New York